How to build the perfect investment portfolio

Investment portfolios – or, in plain English, collections of assets – can diminish the risk inherent in stock markets by diversification or avoiding having too many eggs in one basket.

A huge industry has grown up around that simple fact, ranging from insurance companies – remember with-profits endowments? – to unit and investment trust fund managers.

Now rising numbers of individual investors are taking a more hands-on approach to managing their assets. Your Money asked a panel of leading financial advisers and stockbrokers what tips they would offer to DIY portfolio managers.

Awkwardly, their advice often boils down to doing the opposite of what many people might want to do. For example, Andrew Wilson, head of investment at Towry, pointed out: "Most retail investors, and even many professionals, buy high and sell low.

"It is difficult to be contrarian, but that is the only way to beat the market. Buying cheap assets should work over time, while owning expensive assets is the quickest way to the poorhouse."

Beware that short-term speculation is much riskier than long-term investment. Mark Dampier of Hargreaves Lansdown said: "Don't invest unless you have a 10-year view. Spread your money across different fund groups and countries but appreciate that if the solids get into the air conditioning, as they did after 9/11, there are few hiding places other than cash.

"Be patient. The fewer decisions you make, the better. If the markets are on News at Ten because they have fallen out of bed, get ready to add to holdings, not sell."

"Fill them with great fund managers for long-term returns. The 'Rule of 72' is a great help in perspective and understanding the best type of investments for growth. Take any annual rate of return, divide it into 72 and it tells you how long it takes to double your money.

"So 2pc takes 36 years, 6pc takes 12 years and 14pc – achieved by Neil Woodford of Invesco Perpetual since 1989 – takes little more than five years. Now you can see why some folk reach retirement with big funds and great income, while others are just above poverty levels."

Avoid trading too frequently – because this may merely boost costs – but don't "file and forget" either. Darius McDermott of Chelsea Financial Services said: "While we don't think switching every five minutes is the best strategy, nor is never reviewing your portfolio. You may need to rebalance or change a fund due to a manager change or bad performance. If you just leave your investment and only look at it just before you retire, you could be in for a nasty surprise.

"On the other hand, try not to become emotionally attached to an investment, as that may make you hold on to an underperforming investment too long and lose a lot of money.

"As investors near their goals – or the time when they need cash – they should be thinking about 'de-risking' their investments so that if markets fall dramatically they don't lose 30pc of the money they need next month. When that isn't done, the consequences can be dire."

Reward success and punish failure to keep your portfolio performing. Brian Dennehy of FundExpert.co.uk said: "If you're making money, stick with your winners, sell your losers. This can feel painful, but is vastly more profitable in the long run. Be sceptical when people say that past performance is not a guide to the future. This is nonsense. Past performance provides the most reliable information about how a fund is likely to perform in the future."

Consider your current circumstances – especially your age and attitude to risk – before deciding on the asset allocation strategy appropriate to your portfolio. Rob Burgeman of Brewin Dolphin explained: "For a 30-year-old investor, looking at saving for his or her retirement, a higher-risk portfolio might be entirely appropriate as the funds will probably not be required for 40 years.

"However, for someone just entering retirement, with no great capacity for loss, one would have to question how great a proportion of one's assets should be in a high-risk environment."

Should you buy shares or pooled funds, such as unit and investment trusts, or a mixture of the two?

David Battersby of Redmayne-Bentley stockbrokers advised: "Someone wanting income may seek exposure to fixed-interest bonds to provide security of income and capital, with higher-yielding UK shares and no overseas exposure. British companies tend to pay higher dividends than foreign ones. UK equities that provide higher income currently include Glaxo and BAE Systems. When looking for growth, a more global approach is required and this should be done only through pooled funds as expertise in foreign markets is a specialist matter. My preferred route is investment trusts that trade on the London Stock Exchange for exposure to the US, Europe, Far East, Japan and emerging markets."

To reduce the risk of bad timing – or investing heavily before prices fall – take a gradual approach to build your portfolio.

Ben Yearsley of Charles Stanley stockbrokers cautioned: "Don't feel the need to buy everything in one go, there is nothing wrong with dripping money into the markets over, say, a six-month period.

"Don't always go for the highest-yielding shares, there may be a big reason why an apparently cheap share is in the bargain basement. Finally, there is nothing wrong with profit taking, don't be afraid to bank your gains."